The Great Wall of Money: Power and Politics in China's International Monetary Relations

By Eric Helleiner and Jonathan Kirshner

As an economic superpower, China has become an increasingly important player in the international monetary system. Its foreign exchange reserves are the largest in the world and its exchange rate policy has become a major subject of international economic diplomacy. The internationalization of the renminbi (RMB) raises critical questions in international policy circles: What kinds of power is China acquiring in international monetary relations? What are the priorities of the Chinese government? What explains its preferences?

In The Great Wall of Money, a distinguished group of contributors addresses these questions from distinct perspectives, revealing the extent to which China’s choices, and global monetary affairs, will be shaped by internal political factors and affect world politics. The RMB is a likely competitor for the dollar in the next couple of decades; its emergence as an important international currency would have substantial effects on the balance of power between the United States and China. By illuminating the politics of China’s international monetary relations, this book provides a timely account of the global economy, the role of the renminbi in international relations, and the trajectory of China’s continuing ascendency in the coming decades.

• Language: English
• Publisher: Cornell University Press
• Release date: Sep 8, 2014
• ISBN: 9780801454660

Book preview

THE GREAT WALL OF MONEY

Power and Politics in China’s International Monetary Relations

EDITED BY ERIC HELLEINER AND JONATHAN KIRSHNER

CORNELL UNIVERSITY PRESS

ITHACA AND LONDON

CONTENTS

Preface

Contributors

List of Abbreviations

The Politics of China’s International Monetary Relations

Eric Helleiner and Jonathan Kirshner

1. The China Question: Can Its Rise Be Accommodated?

Benjamin J. Cohen

2. The Hidden History of China and the IMF

Eric Helleiner and Bessma Momani

3. Why Has China Accumulated Such Large Foreign Reserves?

David A. Steinberg

4. Global Imbalances and the Limits of the Exchange Rate Weapon

Hongying Wang

5. China’s Engagement with International Macroeconomic Policy Surveillance

Andrew Walter

6. The Limits of China’s Monetary Diplomacy

Yang Jiang

7. China’s Rising Monetary Power

Gregory Chin

8. Regional Hegemony and an Emerging RMB Zone

Jonathan Kirshner

References

PREFACE

In our earlier volume The Future of the Dollar, we took as our point of departure a basic question: What is the future of the US dollar as an international currency? We quickly realized that searching for the (elusive) answer to that question was less intellectually satisfying than considering why experts from distinct academic specializations and perspectives came to divergent conclusions. A similar philosophy informed our approach to this project. Looking beyond the dollar and toward the future of the international monetary system more generally, it was clear to us that China would play a larger role in that evolving order. In addition, it seemed equally clear that the nature and significance of that role would be determined by policy choices made by the People’s Republic. But what will inform these choices and what kinds of international monetary power is China acquiring? These political questions have often been overlooked in the growing literature on Beijing’s monetary management, most of which has been dominated by questions rooted in economics. This book is about the essential role that politics and power play in forging China’s international monetary relations. By bringing together scholars with distinct points of departure—students of the international political economy of money and China specialists—our goal once again is to illuminate the way in which particular analytical pathways yield varying expectations. By analyzing the various political sources and motivations of China’s policy choices, we hope that scholars will be better positioned to anticipate and understand them. Some names in this book are transliterated using the old Wade-Giles system, when the historical analysis concerns a time period in which this system was in use.

We have incurred many debts in putting this book together. We are, of course, particularly grateful to the contributors for their participation in this project over the course of its evolution and for their diligence in meeting deadlines. Several scholars also provided very insightful and helpful feedback on the chapters and the book, including Sarah Eaton, Wendy Leutert, Odette Lineau, Carla Norrlof, Tom Pepinsky, and two anonymous reviewers. For their invaluable logistical support as well as help in the preparation of the manuscript, we thank Elaine Scott, Sandra Kisner, Wendy Leutert, and Antulio Rosales. As always, Roger Haydon provided excellent evaluations and advice, and we are grateful for his support for this project. The editorial work of Gavin Lewis and Susan Specter was also extremely helpful. And finally, for their financial assistance, we thank the Reppy Institute for Peace and Conflict Studies, the Social Sciences and Humanities Research Council of Canada, and the Trudeau Foundation.

CONTRIBUTORS

GREGORY CHIN is Associate Professor in the Department of Political Science at York University (Canada).

BENJAMIN J. COHEN is Louis G. Lancaster Professor of International Political Economy in the Department of Political Science at the University of California, Santa Barbara.

ERIC HELLEINER is Faculty of Arts Chair in International Political Economy and Professor in the Department of Political Science at the University of Waterloo and the Balsillie School of International Affairs.

YANG JIANG is Senior Researcher at the Danish Institute for International Studies.

JONATHAN KIRSHNER is the Stephen and Barbara Friedman Professor of International Political Economy in the Department of Government and Director of the Reppy Institute for Peace and Conflict Studies at Cornell University.

BESSMA MOMANI is Associate Professor in the Department of Political Science at the University of Waterloo and the Balsillie School of International Affairs.

DAVID A. STEINBERG is Assistant Professor in the Department of Political Science at the University of Oregon.

ANDREW WALTER is Professor of International Relations in the School of Social and Political Sciences at the University of Melbourne.

HONGYING WANG is Associate Professor in the Department of Political Science at the University of Waterloo and the Balsillie School of International Affairs

ABBREVIATIONS

THE POLITICS OF CHINA’S INTERNATIONAL MONETARY RELATIONS

Eric Helleiner and Jonathan Kirshner

The Chinese government has become an increasingly important player in international monetary relations in recent years. Once the IMF’s latest quota review is implemented, China’s voting share in this institution at the center of global monetary governance will be the third largest after those of the United States and Japan. Its foreign exchange reserves have become the largest in the world—ever—at a staggering $3.5 trillion by mid-2013. Its exchange rate policy has become a major subject of international economic diplomacy and is closely scrutinized, and often shadowed, by countries around the world. The internationalization of the renminbi is also attracting growing attention in international policy circles. And all of this, of course, takes place in the context of China’s continuing emergence as a great power, which both conditions and complicates its own policies and the reactions of other states to those initiatives.¹

To date, the study of China’s increasingly important role in the international monetary system has focused primarily on economic questions and technical issues, with much less detailed attention given to the politics of China’s international monetary relations. This volume aims to help redress this imbalance by considering the following questions: What kinds of power is China acquiring in international monetary relations? What are the priorities of the Chinese government in this sphere? What explains its preferences? Answers to these questions should help inform our understanding of the future of the global economy, the prospects for international relations, and the trajectory of China’s continuing emergence in the coming decades.

In this introduction, we elaborate on these three questions, highlighting essential variables, considering the range of possible outcomes, and situating the perspectives and contributions of the chapters that follow. The authors in this volume occasionally disagree with regard to their expectations, and in their choices of different levels of analysis seen as crucial for explaining and anticipating outcomes. But collectively they reveal the extent to which China’s choices, and global monetary affairs, will be shaped by political factors.

What Kinds of Power Is China Gaining in International Monetary Relations?

International monetary relations concern issues such as the relative values and exchange of countries’ currencies, the choice and management of international currencies, and financing of and adjustment to international payments imbalances. Market dynamics certainly shape outcomes across these various issues. But state choices and political contestation at both the domestic and the international level also play a crucial role, with outcomes often determined by the exercise of power.

The study of state power in international monetary relations has in fact attracted considerable scholarly attention among political scientists in recent years.² Some analysts have focused on episodes in which one state directly forces another to change its behavior. Other scholars have emphasized more indirect structural forms of power involving manipulation of international monetary rules or the unilateral shaping of the international monetary environment—whether by active measures or even by passive inaction—in which foreigners must operate in ways that prompt changes in the latter’s behavior and even their interests.³ Important distinctions have also been drawn between power-as-influence and power-as-autonomy. The former involves the ability to change others’ behavior, while the latter is the capacity to act without restraint, independently from external influence.⁴

This volume explores how China’s power is growing in an uneven manner across several key dimensions of international monetary relations, including the financing of payments imbalances, the politics of macroeconomic adjustment, its role in international institutions, and the international use of its currency. Perhaps the most visible aspect of this power has been China’s growing role as a provider of balance of payments financing for deficit countries around the world. This role reflects not just the country’s creditor status which emerged in the early 2000s but also the fact that the vast majority of China’s foreign claims are state-controlled because they are held as official exchange reserves or owned by state-owned banks, sovereign wealth funds, and other investment vehicles.

There is no question that China has acquired new power because of its creditor status and its provision of balance of payments finance. When China has offered such finance directly to countries, its influence over those countries has been enhanced. But the extent of this power-as-influence is hotly debated, particularly in the case of the United States whose current account deficits China has helped finance. Some scholars argue that China has acquired influence over the United States because of the latter’s dependence on Chinese financing. Others are less sure, arguing that the situation is better characterized as one of mutual vulnerability because of China’s dependence on both the US export market and the depth of US financial markets. As China’s holdings of US assets have grown to enormous levels, analysts have also noted that Chinese policymakers have felt increasingly compelled to support the United States economically.⁵

As the Chinese government has helped boost the IMF’s capacity to offer balance of payments finance, it has also successfully demanded greater influence in that multilateral institution. As noted above, under quota revisions agreed to in 2010 (but not approved by all members as of late 2013), China’s voting share is set to grow from 3.81 percent to 6.07 percent, leaving it with the third largest voting share in the institution behind the United States (16.5 percent) and just behind Japan (6.14 percent). In mid-2011, a Chinese official, Zhu Min, was for the first time appointed as one of the Fund’s deputy managing directors.

China is also one of the top two contributors (alongside Japan) to a new multilateral East Asian fund created in 2010—originally with $120 billion and then doubled in 2012—to provide balance of payments finance to countries in the region. Again, the size of its contribution—almost a third of the total size of the fund—has given it influence in designing this institution. This Chiang Mai Initiative Multilateralization (CMIM) arrangement built on a network of bilateral swaps that had been first established in 2000 as the Chiang Mai Initiative (CMI), in which China had also played a lead role.

China’s creditor status, and the growing size and openness of its economy, have also transformed the country into a more powerful player in international debates on the politics of macroeconomic adjustment. Such adjustment is the stuffing of international monetary politics, as countries jockey to shift often painful burdens abroad. (The recent upheavals in the eurozone illustrate how bitter, and contested, those costs can be.) Powerful states are often able to shuck off some of these costs onto other countries, as when the United States unilaterally closed the gold window in 1971, forcing its economic partners to adjust to its new policies.⁶ This type of power is visibly accruing to China; as Cohen has noted, its large creditor position has insulated the country from the kinds of external pressures for adjustment that are often experienced by debtor countries. Additionally, foreign dependence on Chinese investments has discouraged foreign governments from pressuring China too strongly in areas such as exchange rate policy.⁷

The changing balance of monetary power is also evident in Sino-American relations. The United States has found that its ability to pressure China indirectly to assume more of the burden of adjustment to global imbalances through dollar depreciation has been less effective than it had been vis-à-vis other foreign surplus countries such as Japan or Germany. Over the course of the 1970s, for example, under American pressure and despite Japanese foot-dragging, the yen doubled in value, from 360 to 180 to the US dollar; a decade later it appreciated from 160 to 80.⁸ But the Chinese government has more successfully resisted the US dollar weapon through large-scale currency interventions that have been sterilized via the state-controlled financial system to minimize the kinds of domestic inflationary pressures that Germany and Japan experienced when they defended their currencies.⁹

Alongside its growing power in the politics of payments finance and adjustment, China has acquired additional influence within key international institutions that address these and other international monetary issues. In addition to its role in the IMF and CMIM, China has become a key player in the new G20 leaders’ forum created in November 2008. This body quickly replaced the G7 (of which China was not a member) as the premier venue for international economic cooperation among the leading powers. In a regional context, China has also emerged as a key player in the ASEAN + 3 grouping which has been fostering East Asian monetary cooperation through the CMI/CMIM and other regional initiatives.

China’s growing power in international monetary relations is thus multidimensional. But it is also uneven, and its trajectory still uncertain. (In particular, its upward trend might be set back if the country’s notable internal debt and financial problems take a turn for the worse, or if the country experienced an internal financial crisis.) A defining question centers on the prospects for the RMB’s international role, which, although growing, is still relatively modest. As Chin notes, the Chinese government is very aware of the enduring structural power in international monetary relations that the United States derives from the dollar’s international dominance. United States management of the dollar shapes the international monetary environment within which countries, including China, operate. The dollar’s global role also enables the United States to more easily finance payments imbalances and deflect the costs of adjustment onto foreigners. American policy-as-autonomy is also boosted by the fact that its monetary authorities need not be so concerned about how exchange rate movements might affect domestic balance sheets because very little of the country’s public and private debt is denominated in foreign currencies. Foreign dependence on dollar liquidity during international financial crises has also given US monetary authorities enormous international influence at those moments.

What is the international destiny of the RMB? There is an observable historical pattern in which great powers have sought to extend the reach and influence of their currencies. But in more recent history, states poised to emerge as players on the monetary scene have been more cautious about internationalizing their currencies. They have been less geopolitically ambitious, wary of the costs involved, and averse to the risk of sacrificing domestic macroeconomic policy autonomy. As Cohen notes, both West Germany and Japan were reluctant to encourage the internationalization of their currencies after the breakdown of the Bretton Woods monetary system in the early 1970s, lest they lose control of monetary policy. These states also had reasons to be cautious about their geopolitical aims, as they were dependent for their security on the incumbent issuer of the key currency. West Germany’s unique position led some scholars to label it a semisovereign state. Japan’s security dependence on the United States was also very high, although its policymakers in the 1990s, first with rising political ambition and later in search of greater economic insulation, became much more receptive to the idea of a greater international role for the yen.¹⁰

The leaders of the Chinese Communist Party are especially sensitive to encroachments on their policy autonomy, and place a great premium on stability, which suggests that they will be cautious about the extent to which they loosen their control over their currency. This will shape the nature of RMB internationalization, but so will other factors, including China’s distinct geopolitical position and aims. Internationalization is clearly coming; the question is largely a matter of how much, how fast, to what extent, and with what ceiling.

The RMB’s use is already increasing in the East Asian region, and a number of key Southeast Asian countries now are linking their exchange rate management more closely to the RMB than to the dollar. Some analysts, such as Arvind Subramanian, have predicted that the RMB’s broader international role may soon expand very quickly. Drawing on over a century of data, he highlights a statistical correlation between a country’s size in the world economy—measured by GNP, share of world trade, and net creditor status—and the international reserve role of its currency. Based on this past experience, Subramanian predicts that the RMB should overtake the dollar as the primary reserve currency by the early 2020s. Other analysts analyses are much more skeptical; Mallaby and Wethington, for example, argue that the rise of China’s currency will be slower than commonly predicted, and the yuan is more likely to assume a place among secondary reserve currencies. The World Bank splits the difference, anticipating a multi-currency scenario (dollar, euro, yuan) in place by 2025.¹¹

Whatever the scenario, a common denominator is that the outcome will be determined more by politics than economics, as both the RMB optimists and pessimists explicitly recognize. Subramanian acknowledges, for example, that his prediction is conditional on the Chinese government launching far-reaching financial reforms to allow the currency to be held in more liquid markets, including full currency convertibility and the cultivation of domestic financial deepening.¹² Mallaby and Wethington, on the other hand, argue that Chinese policymakers might be wary of unleashing such reforms. Several chapters in this volume emphasize how the Chinese government has begun to undertake financial reforms to promote RMB internationalization. China has also sought to bolster the RMB’s international role in more direct ways by establishing a number of swap arrangements with foreign authorities as well as bilateral agreements that encourage the signatories to use each other’s currencies in bilateral trade. Other chapters stress the limited and qualified nature of those reforms, but all contributors see politics as determining the ultimate outcome.

If these initiatives intensify and are successful in boosting the RMB’s international role, China’s power in international monetary relations will be considerably strengthened. But the contributors to this book have different perspectives on the strength of the Chinese government’s commitment to RMB internationalization. Jonathan Kirshner argues that the RMB’s growing international role is a virtual certainty and that it will provide China with new structural power, particularly in the East Asian region. Yang Jiang, however, is more cautious, noting the considerable concerns that exist within the Chinese government about the loss of financial and monetary control associated with financial liberalization. She emphasizes that the bilateral approach favored by China leaves its monetary diplomacy shallow, symbolic, pragmatic, and short term–oriented, suggesting a cautious and gradualist approach to RMB internationalization. Gregory Chin shares with Jiang the view that China’s leadership prioritizes stability and order, but he nevertheless detects signs of considerable monetary ambition.

China’s International Monetary Priorities: Taker, Maker, or Breaker?

Regardless of the pace and disposition of the RMB’s international role, it is clear that China’s international monetary power is growing. Thus it is important to try and discern the priorities and intentions of Chinese policymakers in the international monetary system. In broad brush, a rising power can be a taker, maker, or breaker of an existing international order. Obviously, these are idealized, abstract possibilities—practice will be much less pristine than theory—but they nevertheless capture the basic options open to China in the future, and reflect the different choices made by states in the past. In the first role, China would remain a rule-taker, essentially supporting the international monetary status quo—playing a larger role in a game governed by the same rules. In the second role, it would emerge as more of a rule-maker, demanding significant reforms to that status quo. In the third role, as a rule-breaker, China would challenge the existing system either by demanding wholesale transformation or by exiting that system to create its own arrangements.

These choices have profound consequences for the nature and pattern not only of international monetary affairs but for world politics more generally. Japan in the half-century from 1881 to 1931 was a classic example of a taker—going to heroic (and at times misguided) lengths to embrace the classical gold standard system that then represented a Good Housekeeping Seal of Approval for economic management. Those who bought into this system understood that to join it was to take a seat at the grown-ups’ table as defined by the established great powers. Japan achieved this only through the painful Matsukata deflation of the 1880s, and the even more draconian measures undertaken in order to restore (and then maintain) the gold standard in the 1920s. (Interestingly, although Finance Minister Matsukata aspired to join the existing system, he was a nationalist, suggesting, importantly, that assuming the role of taker need not imply a lack of international ambition.) And for better or worse (actually, entirely for worse) Japanese banking elites were such takers that they became, as late converts often are, holier than the pope, and stuck with the gold standard even after Britain itself was forced to abandon it, with catastrophic consequences for Japan’s domestic politics.¹³

Interwar France, on the other hand, illustrates the tumult that can be brought about by an influential participant in monetary politics that chooses to play the role of a breaker (even though breakers rarely self-identify as such). France dissented from the gold exchange standard system that emerged from the Genoa monetary conference of 1922. France did not play by the rules of the system, registered its opposition regularly and loudly, often made mischief, and accumulated vast stores of gold at a rate and in a manner that storm-tossed the rickety monetary regime. The French subversion of the Genoa system contributed to the catastrophic collapse of the international monetary order in 1931, in the wake of the uncontained global financial crisis that emerged after the failure of the Austrian Creditanstalt bank, and this in turn considerably deepened the Great Depression. The Genoa system was broken, and France was a key breaker. Of course it takes at least two to disagree, and both international political discord as well as a divergence of ideologies about proper international monetary governance caused this collapse. The interwar experience suggests potentially alarming parallels for the present day, should political relations between the United States and China deteriorate.¹⁴

Finally, the United States, of course, provides the archetypical example of a maker. Determined to avoid the mistakes of its interwar isolationism and short-sighted foreign economic policies, and driven by various economic and strategic motivations, the United States set up (and bankrolled) the Bretton Woods international monetary system. Learning, ideology, interest, and geopolitical imperatives went hand in hand (and were each essential) as the United States carried the heaviest stones, and coordinated the effort, that built the postwar monetary order.¹⁵

Handicapping the nature of China’s integration and expanding role in the international monetary order will not be easy. As Benjamin Cohen notes, even if the Chinese government were to embrace the path of a relatively socialized taker of the rules of the game, accommodating the changes implied by such a trajectory would still tend to be naturally, even inherently, disruptive. A complicating factor, he adds, is that Beijing appears to be working hard to tilt the global balance of monetary power as much as possible in its favor, quite unlike anything attempted at a comparable stage by Germany, Japan, or Saudi Arabia. This is certainly related to the fact that, unlike those other states as they emerged as more prominent players on the postwar world’s monetary stage, China is neither an ally nor a client of the United States, but, even in the most benign sense of the concept, a geopolitical rival. Indeed, as Kirshner also emphasizes, it is the first newcomer on the monetary scene in seventy years that can be seen as a potential adversary to the system’s most prominent participant, and this matters, given the political challenges that are inherent to managing international monetary relations.¹⁶ This would present challenges even in a best case scenario. In fact, the evidence to date on the Chinese government’s intentions is mixed. Jiang observes, for example, that it has been very critical of the conditionality that the IMF has imposed on developing countries and registers its opposition to neoliberal ideology in global monetary governance. Yet at the same time, she emphasizes that the People’s Republic has not offered a clearly articulated or ambitious alternative vision, proffering instead only symbolic gestures, and motivated by defensive instincts.

Not surprisingly, then, scholars—including contributors to this volume—hold different perspectives on this question and each can cite evidence to support his or her position. These very different views of the priorities of the Chinese government in international monetary relations are not necessarily irreconcilable. Chinese priorities may have shifted over time. Indeed, some contributors to this volume (especially Chin and Kirshner) argue that the global financial crisis was an important watershed, encouraging Chinese officials to embrace more ambitious and experimental goals in international monetary relations. Chinese officials may also assign different priorities to distinct issue areas within international monetary relations. Equally important, it is necessary to avoid overstating the unity of Chinese officialdom itself; different Chinese policymakers have different perspectives, and the resulting constellation of policies might not reflect a singularly coherent driving vision.¹⁷

From one perspective, the Chinese government has to date been very much a supporter of the status quo. With its accumulation of massive dollar reserves, China has reinforced the dollar-based international monetary order. Its conservatism was also apparent during the 2008 global financial crisis when some had predicted that China might pull back its US investments, perhaps even as a kind of payback for the American bungling of the 1997–98 East Asia crisis.¹⁸ Instead of acting as a destabilizer, China bolstered the system by providing crucial ongoing support for the dollar and for US current account deficits. In the words of one critic, China served as America’s head servant in this episode.¹⁹ The contrast with the behavior of the United States during the Great Depression—when it refused to support European countries in distress—was striking.

Some scholars point to significant material incentives that nudge China in this direction. John Ikenberry, in particular, has emphasized the extent to which the Western order—and this encompasses the entire Organisation for Economic Cooperation and Development, not simply the United States—is very large, very robust, and features a system that is hard to overturn and easy to join. There are also limits to China’s capabilities, something that outside observers tend to minimize.²⁰ And in this volume, Andrew Walter argues that although Chinese officials object to perceived biases in international macroeconomic surveillance, their fear of foreign criticism and stigmatization by the IMF encouraged them to commit after the 2008 global financial crisis to an enhanced surveillance process under the auspices of the G20. Some analysts also highlight how China has been a supporter, rather than a challenger, of the IMF. It is often forgotten that China was in fact one of the founding members of the IMF, playing an